Key Takeaways

Activision Blizzard (ATVI) is scheduled to report earnings after the market closes

(Thursday Market Open) After Americans made their choices on Tuesday for who will fill Congress, investors are once again are looking toward Washington, this time for the results of the Federal Reserve monetary policy meeting.

The extent of yesterday’s post-midterm rally may have taken some market participants by surprise, and as the S&P 500 (SPX) moved above 2800 it looks like a good bit of short covering helped boost the rally. This morning, it appears that some participants may be taking profits and that trading might be relatively subdued as investors and traders wait for the Fed announcement.

Although the central bank is widely expected to leave its key interest rate unchanged, based on futures market projections, investors may still want to scour the language in the accompanying press release to try to glean any clues about the Fed’s monetary policy stance.

Based on what we know now, it seems that the Fed is set to continue raising interest rates gradually if the economy continues to hum along and inflation remains under control. International trade remains a wild card, amid worries that a trade dispute between the U.S. and China could dent global growth.

Post-Midterm Rally Held Some Surprises

U.S. stocks were in a sea of green Wednesday, as relief and pent up demand following midterm elections appeared to be behind a strong rally on Wall Street. The rally took the S&P 500 well above its 200-day moving average around 2763.

The strongest gains came from the consumer discretionary sector, which along with tech and communication services appeared to be rallying on a momentum trade. Optimism about the tech sector appeared to come as the election results seemed to suggest a recent push for regulatory reform may go on the back burner.

Amazon (AMZN) shares were among the gainers Wednesday, rising more than 6.8%. The rally may have been helped by the election results because President Trump has been a vocal critic of the company. It remains to be seen whether the online retailing giant can ride this momentum into Black Friday and the rest of the holiday shopping season.

The healthcare sector also posted strong gains. With Democrats taking control of the house, investors appeared to think a push for broader coverage could benefit some healthcare companies. But it was surprising to see shares of drug makers rally given the possibility pharmaceutical companies could come under pressure if there is a continued focus on lowering drug prices. Part of the rally may reflect positive sentiment for the sector after Eli Lilly (LLY) beat earnings expectations and raised its 2018 outlook.

Another surprise Wednesday was the strong performance in the financial sector given that increased power among Democrats could see a push for tighter regulation of the industry. When Democrats held the House between 2007 and 2011, a lot of tough banking regulation came down the pike.

Wednesday’s rally came despite a continued overhang from lingering worries about trade between the United States and China. The election results may put more pressure on President Trump to get something done on the trade front before the year’s end while Republicans still control both houses of Congress.

ATVI Earnings in View

In earnings news, Activision Blizzard (ATVI) is scheduled to report earnings after the market closes today. ATVI is expected to report adjusted earnings per share of $0.50 on revenue of $1.66 billion, according to third-party consensus analyst estimates. Analysts are more optimistic than ATVI, whose Q3 guidance calls for adjusted EPS of $0.37 on revenue of $1.49 billion.

One thing to keep in mind is ATVI’s management has earned a reputation over the years for issuing conservative guidance. In addition to this quarter’s results, management’s guidance for the upcoming holiday season is likely to be closely watched as well.

ATVI’s stock has also seen some volatility around news of China’s government cracking down on video games in recent months.

Figure 1: The S&P 500, shown in this chart, gapped higher the day after U.S. midterm elections and stayed above its 200-day moving average (blue line) around 2763. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Post-Midterm Markets: Although history is no guarantee of future results, it may be comforting — especially after October’s wild ride — to note that the stock market tends to perform well after midterms. Since 1946, the S&P 500 has gained 67% of the time in the remaining two months of the year, 94% of the time in the six months after and 100% of the time in the 12 months following election day, investment research firm CFRA said in a note Wednesday. “In addition, gridlock may benefit goth multinational and foreign investments as the inability of Congress to pass additional economically stimulative legislation may reduce the trajectory of economic growth, lower the threat of rising inflation, temper the Fed’s hawkish tone, and moderate the gain in the value of the U.S. dollar,” the research firm said.

Holiday Presents for Workers, Retailers: Seasonal workers are key to retailers being able to cope with the holiday rush, and this year it seems like these employees may be getting a holiday present. “U.S. retailers … have started earlier and are paying more and upping benefits in a pitched battle to hire more than 700,000 holiday workers in what is the tightest labor market in decades,” CNBC reported. However, this holiday season could be a bumper one for retailers, providing a cushion for that extra spending. According to eMarketer projections, total retail sales in the U.S. from Nov. 1 through Dec. 31, will hit more than $1 trillion for the first time. The digital marketing research company sees low unemployment, strong income growth, and high consumer confidence as helping to fuel spending.

Strong Consumer Confidence:Speaking of consumer confidence, the market is scheduled to get a reading on that important facet of the economy tomorrow. The University of Michigan’s consumer sentiment index is expected to come in with a reading of 98, according to a Briefing.com consensus. The number for October came in at 98.6. Although that was down from September’s 100.1, the university noted at the time that the index so far this year has been higher than in any previous year since 2000. “Stock price declines, rising inflation and interest rates, and the negative midterm election campaigns, have not acted to undermine consumer confidence,” the university said. “This resilience was primarily due to the prevailing belief that the economy would produce robust job growth during the year ahead, even if overall wage growth remained dismal.”

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